Coffee To Remain Most Affected By Droughts

BMI View: Coffee production is likely to be the most affected by the recent droughts in Brazil. Still, the surge in coffee prices has been exaggerated by a recent spike in net speculative positions, and we see volatility ahead and do not excluding a sell-off in prices in the short term. We believe sugar production will also be affected by the droughts but do not expect prices to break resistance at USc18.00-19.00/lb in the near term. For soybean, we believe fears have been exaggerated as impact on yields for the currently planted crop will be minimal.

We believe the coffee crop will be the most negatively affected by the recent droughts in Brazil. However, we highlight that the surge in coffee prices has been exaggerated by the recent spike in net speculative positions, and we see volatility ahead, not excluding a sell-off in prices in the short term. Managed money, a proxy for speculators, increased sharply in recent weeks, according to data from the Commodity Futures Trading Commission (CFTC). As a result of this turnaround, net long speculative positions moved from negative territory to a three-year high of 30,000. In contrast, commercial buying remained quite steady. As a result, we see potential for these positions to reverse rapidly if concerns over the Brazilian coffee crop ease.

Warmer-than-normal weather (and occasional droughts) in eastern Sao Paulo and Minas Gerais, the country's largest coffee producing state, could take 2014/15 coffee production lower, especially compared with the overly optimistic initial forecasts from local industry and government sources. Current estimates range from 50-52mn to 58-60mn bags for the coming 2014/15 season; we forecast coffee production in Brazil to increase only slightly in 2014/15 to reach 51.0mn bags. Even with our forecast at the lower end of current projections, we expect the global coffee surplus to expand to 9.0mn bags in 2014/15 and the stocks-to-use ratio to reach 30.7%, much higher than the five-year average of 22.2%. This confirms our view that the recent rally may be overstretched and that prices will be particularly volatile in the coming months.

Coffee Specs Surging
Select Commodities - Net Long Speculative Positions

BMI View: Coffee production is likely to be the most affected by the recent droughts in Brazil. Still, the surge in coffee prices has been exaggerated by a recent spike in net speculative positions, and we see volatility ahead and do not excluding a sell-off in prices in the short term. We believe sugar production will also be affected by the droughts but do not expect prices to break resistance at USc18.00-19.00/lb in the near term. For soybean, we believe fears have been exaggerated as impact on yields for the currently planted crop will be minimal.

We believe the coffee crop will be the most negatively affected by the recent droughts in Brazil. However, we highlight that the surge in coffee prices has been exaggerated by the recent spike in net speculative positions, and we see volatility ahead, not excluding a sell-off in prices in the short term. Managed money, a proxy for speculators, increased sharply in recent weeks, according to data from the Commodity Futures Trading Commission (CFTC). As a result of this turnaround, net long speculative positions moved from negative territory to a three-year high of 30,000. In contrast, commercial buying remained quite steady. As a result, we see potential for these positions to reverse rapidly if concerns over the Brazilian coffee crop ease.

Coffee Specs Surging
Select Commodities - Net Long Speculative Positions

Warmer-than-normal weather (and occasional droughts) in eastern Sao Paulo and Minas Gerais, the country's largest coffee producing state, could take 2014/15 coffee production lower, especially compared with the overly optimistic initial forecasts from local industry and government sources. Current estimates range from 50-52mn to 58-60mn bags for the coming 2014/15 season; we forecast coffee production in Brazil to increase only slightly in 2014/15 to reach 51.0mn bags. Even with our forecast at the lower end of current projections, we expect the global coffee surplus to expand to 9.0mn bags in 2014/15 and the stocks-to-use ratio to reach 30.7%, much higher than the five-year average of 22.2%. This confirms our view that the recent rally may be overstretched and that prices will be particularly volatile in the coming months.

On The Boil
Front-Month ICE Coffee (USc/lb, weekly) & RSI (below)

We believe sugar production will also be affected by the droughts but do not expect prices to break resistance at around USc18.00-19.00/lb in the near term. We already expect sugar production to stagnate in 2014/15 as the country's mills continue to divert a higher proportion of cane to ethanol owing to strong price competitiveness for the biofuel. Cane production in the country's centre-south is forecast to stagnate around 595mn tonnes in 2014/15 (according to first estimates from national sugar association Unica), which will not significantly affect our forecast for a sugar production surplus in 2014/15. Copersucar, a major sugar and ethanol trader involved in the country, forecasts cane production in the centre-south to decrease to 570mn tonnes in 2014/15; this could take sugar production slightly down, but it would not be enough to move the global surplus into a deficit. With our current forecast for Brazilian sugar production to stay around 39.0mn tonnes in 2014/15, we project a global surplus of 4.5mn tonnes and the stocks-to-use ratio to reach 25.8%, compared with a five-year average of 23.0%.

Moving Towards Resistance
Front-Month ICE Sugar (USc/lb, weekly) & RSI (below)

We believe current sugar prices already account for anticipated tightness in the sugar market in 2014/15, when most global producers are expected to see production stagnate or fall slightly. However, current momentum in sugar prices, especially if they continue beyond USc18.00-20.00/lb (which is not our core scenario) could encourage farmers in India, Thailand and Australia, to ramp up production for the coming season. This will limit price gains in the coming years and put downside risks to our forecasts for prices out to 2018. For now, we forecast sugar prices to steadily increase over the coming years to average USc20.00/lb in 2018.

Broken Short-Term Resistance
Front-Month CBOT Soybean (USc/bushel, weekly) & RSI (below)

For soybean, we believe concerns about output have been exaggerated, as around 40% of the harvest has already been finished, and impact on yields for the currently planted crop will be minimal. As a result, we expect the country's crop to reach a record high. We are already below consensus in our forecast for Brazilian soybean production and therefore expect any output revisions to have little effect on our global balance projections. We forecast Brazilian soybean production of 84.0mn tonnes in 2014/15, while most sources are still forecasting production of around 88mn-90mn tonnes, even taking into account the drought. We forecast another global soybean surplus of 10.8mn tonnes in 2014/15, with the stocks-to-use ratio at 27.4%, from 25.3% on average over the past five years.

Reaching Records
Brazil Soybean - Production ('000 tonnes) & % y-o-y growth

Over the long term, we believe the recurrence of droughts in Brazil linked to climate change will pose upside risks to our price forecasts for coffee, soybean and sugar, as the country will remain a major producer of all three. Farmers in the country have indicated that the recent drought was one of the longest and most aggressive they have recently experienced, with only about 11mm of rain falling in the past 49 days, compared with 200mm on average for the month of January alone over the past 20 years. Experts from the University of Sao Paulo's Department of Atmospheric Science and the country's Climate Change Council have stressed that the country is going to experience more extremes in weather in the coming decade. Other experts expect that the area to coffee will experience much warmer weather, and coffee plantations in drought areas could be abandoned altogether. A study from Brazil's EMBRAPA, the government's agency for agriculture, estimates that about 10% of the country's coffee crop could be lost by 2020, while 20-22% of its soybean crop could be lost over the same period. No similar estimates have been made for sugar, but the crop could be affected as well. We already forecast broad stagnation in output in these crops for similar reasons, but we could decide to revise down these projections if repeated extreme weather events continue to be seen in the country.

BRAZIL Coffee Production & Consumption
2013 2014f 2015f 2016f 2017f 2018f
Coffee Production, '000 60kg bags 1 50,800.0 48,260.0 51,000.0 45,900.0 55,080.0 52,326.0
Coffee Consumption, '000 60kg bags 2 20,479.5 e 20,991.5 21,411.3 21,839.5 22,276.3 22,721.9
Notes: e BMI estimates. f BMI forecasts. Sources: 1 CONAB; 2 International Coffee Organisation.
BRAZIL Sugar Production & Consumption
2013 2014f 2015f 2016f 2017f 2018f
Sugar Production, '000 tonnes 1 38,300.0 38,800.0 39,000.0 39,624.0 40,614.6 41,264.4
Sugar Consumption, '000 tonnes 2 11,778.5 e 12,082.4 12,407.3 12,754.3 13,124.7 13,520.1
Notes: e BMI estimates. f BMI forecasts. Sources: 1 CONAB, USDA; 2 USDA.
BRAZIL Soybean Production & Consumption
2013 2014f 2015f 2016f 2017f 2018f
Soybean Production, '000 tonnes 1 82,000.0 86,000.0 84,000.0 85,680.0 87,393.6 89,141.5
Soybean Consumption, '000 tonnes 2 38,571.0 e 40,050.0 41,451.7 42,695.3 43,762.7 44,637.9
Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA; 2 FAPRI, USDA.

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